*Note: This blog is written by a company Founder and co-owner, and should be considered neither legal nor tax advice. It is my sole assessment and opinion based on my read of the CARES Act, recently signed into law.
Beyond the human health toll wreaked upon the world by COVID-19, we’re also now in the throes of economic whiplash from entire sectors of the economy shutting down nearly overnight.
To the credit of the United States government, swift action has been taken to provide an unprecedented $2.2 Trillion stimulus package known as the CARES Act (Coronavirus Aid, Relief, and Economic Security Act), which was signed into law Friday, March 27, 2020.
Inside this H.R.748 – CARES Act bill (150,229 words!) are provisions for Individuals ($560B), Big Corporations ($500B), Small Businesses ($377B), State & Local Governments ($340B), Educational Institutions ($44B), and Safety Net ($26B) measures.
This post focuses on the portions of the stimulus directed at Small Businesses – largely because at CIENCE, although we have our share of Big Corporations as clients, the majority of our hundreds of customers fit within the “small business” definition (firms with less than 500 employees).
KEEPING AMERICAN WORKERS PAID AND EMPLOYED ACT
It’s almost incalculable how much damage the Coronavirus has inflicted on the Small Business community, and in such a short time. Aside from work-from-home (WFH) mandates, we’re seen entire sectors like travel, hospitality, and retail proverbially hit the wall at 60 MPH. Of the more than 3.3 million people filing for unemployment in the week ending March 21 (a new record, by multiples), were many, many Small Business employees.
Reading the actions taken by these early cost-cutters, many other firms are putting in place action plans to reduce costs – and headcount tops the list.
Division A, sections 1101–1114 of the CARES Act addresses this head-on and is an attempt to offer a bridge to any/all businesses affected through the offer of low interest (< 4%), deferred payment, and fully guaranteed loans (with generous forgiveness clauses). In fact, this is the main takeaway of the bill – that $377 billion has been earmarked without any screening penalty for the capacity to repay for Small Businesses to take advantage of.
This is the broadest, and interesting, part of the entire CARES Act, and (as is the case with so much of what has unfolded in the last 30 days) is complete without precedent in the history United States:
IN GENERAL. –During the covered period, in addition to small business concerns, any business concern, nonprofit organization, veterans organization, or Tribal business concern described in section 31(b)(2)(C) shall be eligible to receive a covered loan if the business concern, nonprofit organization, veterans organization, or Tribal business concern employs not more than the greater of – (I) 500 employees.
That also includes special cases beyond 500 employee-organizations. The only real stipulation seems to be that the business had to be a going concern – generating revenue and paying salaries and payroll taxes or 1099 Contractors – as of February 15, 2020.
Put simply, every small business in America should apply for these loans.
It makes sense to contact your banker or lender immediately if you haven’t already done so, to get in line as there will likely be an amazing backlog for processing these loans. For help with determining an appropriate source for loans, please visit this website.
As alluded to earlier, perhaps the most striking feature of these fully-backed loans is that capacity for repayment is not a condition of the loan.
NONRECOURSE. –Notwithstanding the waiver of the personal guarantee requirement or collateral under subparagraph (J), the Administrator shall have no recourse against any individual shareholder, member, or partner of an eligible recipient of a covered loan for nonpayment of any covered loan, except to the extent that such shareholder, member, or partner uses the covered loan proceeds for a purpose not authorized under clause (i).
The specific callout of nonrecourse for anything other than non-permitted uses of the loans makes them highly unusual in the world history of loan-making, though that is a philosophical debate for a later day.
Loans can be used for a variety of purposes:
(I) payroll costs;
(II) costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
(III) employee salaries, commissions, or similar compensations;
(IV) payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation);
(V) rent (including rent under a lease agreement);
(VI) utilities; and
(VII) interest on any other debt obligations that were incurred before the covered period.
The spirit of the CARES Act also uses definitive language to acknowledge that funds will be used, “to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments.” In other words, these loans are designed specifically to help businesses establish continuity in payroll and other major payments, as a way to keep capital flowing to workers (consumers) and back to businesses.
Any loan guaranteed under paragraph (36) of section 7(a) of the Small Business Act is eligible for forgiveness as follows:
Forgiveness. –An eligible recipient shall be eligible for forgiveness of indebtedness on a covered loan in an amount equal to the sum of the following costs incurred and payments made during the covered period:
(1) Payroll costs.
(2) Any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation).
(3) Any payment on any covered rent obligation.
(4) Any covered utility payment.
Owing to calculations inherent to each Small Business, the forgiveness amounts on each loan are subtracted from the above totals should the business lay off employees or trim salaries. Of note, too, employee salaries above $100,000 are not eligible for forgiveness. In other words, the unique benefits of these loans are structured to ensure they are used to keep payrolls intact, and failure to do so might cause the terms of the loans to change.
It’s tempting to say that this is about as clean an economic stimulus as it gets. Perhaps there is strong recognition on behalf of lawmakers that the US Government will be on the hook for worker salaries – whether through unemployment claims or now through forgivable loans and as I business owner, I appreciate the simplicity of this approach: the capabilities and systems to deliver the right amount of stimulus (about equal to a monthly paycheck, very month) directly to most Americans’ bank accounts already exist in the form of corporate (and especially small business) payroll systems.
In addition to the most interesting features above, there is plenty more to the CARES Act to help Small Businesses with specific grants and disaster relief aid. There are also obvious incentives to SBA lenders (often Small Businesses themselves) without loan fees. The schedule of lender fees on loans caps at 5% for the smallest amounts, dropping to 1% on the largest of loans up to the maximum loan amount of $10,000,000.
In addition, at this stage companies should not worry about whether applying for one form or relief via the SBA and/or CARES Act will preclude them from taking advantage of other elements of the relief. While it appears that the “use of funds” for participation in the various stimulus packages must be different (e.g., you almost certainly can’t use a disaster relief loan to cover payroll and cover the same payroll with the Payroll Relief features of CARES), there is nothing precluding businesses from receiving stimulus via any combination of the programs for which they are eligible.
To apply directly for a disaster relief loan with the SBA, please visit this page.
In the face of such stunning and swift tragedy, It’s heartening to see recognition and swift action by the federal government to mitigate the risk of unnecessary closures of Small Businesses that cannot easily be put back together. It’s just better to avoid bankruptcy, layoffs, and loss if these can be averted, and if those of us that are Small Businesses ever wanted an indication of the central role we play in making this great economy go, this is it.
The government has started the ball rolling and is cutting all of the bureaucratic red tape usually associated with finance programs, at stunning speed, and now Small Businesses must do their part and apply for these loans in order to survive. This economic response appears to meet the moment in ways unforeseen – even unimaginable – in past crises, or even a mere 60 days ago.
I would urge Small Business owners to use these resources available to save their businesses in order to increase the likelihood that they will be able to return, at some point, to a sense of normalcy post-crisis.